It’s been the same message over and over again: homebuyers hoping to get their first home have grown weary of being trumped on every offer … by someone with cash. While the words differ, the meaning is the same: “We quit.” And by the hundreds, they’ve put their dreams on hold, gone back to their rentals, re-signed leases and hunkered down for the long haul.
It’s been a long, hard road for homebuyers, especially those with FHA or VA loans. In 2012, cash offers in the entire East Bay housing market accounted for approximately 31% of all closed transactions*. Percentages jumped dramatically for Q1/2013, weighing in at over 40%.
And now, things appear to be changing. With more homes coming onto the market, we’re seeing a sharp increase in inventory and corresponding decline in the numbers of multiple offers. The most telling indicator of all, however, is the fact that cash offers, especially in the bottom end of the market, are starting to disappear like snow on a warm spring day.
Good news for normal homebuyers? Absolutely. The last 18 months have been very hard on homeowner wannabes. Extremely low inventory and jaw-dropping low interest rates coupled with record numbers of ready and able homebuyers have combined to produce intense competition, driving prices skyward. As values have increased, investors have seen CAP rates and ROI slip dramatically. Consequently, many are no longer finding Bay Area investment returns palatable, it appears they are now looking for other locales in which to park their cash. Cities that have historically represented the bottom end of the market (Hayward, San Leandro, San Lorenzo, parts of Oakland, Concord and regions beyond) have seen a sharp decline in cash offers, opening the door for buyers with marginal loan products (FHA, VA and low-down conventional loans) to finally get a toehold.
In contrast, as you look at the higher end of the market, cash offer percentages remain firm. Rather than investor-based transactions, owner-occupants account for the majority of purchases. They either have a lot of cash themselves or are relying on relatives, many of whom are offshore, to fund the purchases. These sales are happening in upscale neighborhoods like Fremont, Pleasanton, San Ramon, Danville, Lafayette and Walnut Creek. While the number of investor-driven cash offers are dropping at the bottom end of the market, cash offers coming from owner-occupants remain strong, especially in higher-priced neighborhoods. In fact, it appears that as the Bay Area economy strengthens, some segments of the upper end of the housing market are actually seeing a slight increase in cash offers.
Overall, there is a lot less cash flowing to the market which, in my opinion, could be the decisive signal we’ve been waiting for indicating that the market may be beginning to return to normal … whatever that means.
*All transactions shown on the MLS that stated the property closed with cash. In reality, many cash offers never hit the MLS, and not all cash transactions on the MLS were recorded correctly, meaning the actual percentages for cash offers is higher than stated.